Taxpayers who have a close family relationship and live with a child for more than half the year can often claim various child tax benefits, like the earned income tax credit (EITC) and the child tax credit (CTC). For some families raising children, these relationship and residency rules can be difficult to navigate and may lead some to claim tax credits in error. For others, their caregiving arrangements do not align with these rules, making them ineligible for child tax benefits.
Today’s rules for determining who may claim a child have evolved in ways that have sometimes made them less inclusive and, other times, expanded eligibility. These changes have often been accompanied by stated congressional interest in reducing the amount of tax benefits claimed incorrectly (reducing noncompliance). This focus on reducing noncompliance remains important, especially as the tax system serves as the largest source of cash assistance for low-income families with children. Some policymakers recognize that the existing rules exclude some families from tax benefits and are interested in making these rules more inclusive of diverse caregiving arrangements.
Our research on the legislative history of connection tests suggests that the most durable path forward for updating these rules would include proactively addressing potential compliance issues, ensuring that taxpayers can follow and substantiate compliance with the rules and the IRS can administer them.
